Exclusive: Fed’s Bostic says idea of September pause is not tied to any looming market rescue

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Atlanta Fed Chairman Raphael Bostic, in an exclusive interview with MarketWatch, said his suggestion that the central bank take a “pause” in September in its push to raise interest rates should not be it should in no way be interpreted as a “fed up of the Fed” or the belief that the central bank would come to the rescue of the markets.

In a Tuesday interview, Bostic said the notion of any kind of “Fed put” was never a factor in his thinking.

“I think it’s a good story somehow for storybooks, but it’s not determining how I’m thinking about politics,” he said.

Financial market conditions have tightened sharply this year as the Fed has begun to raise its benchmark in the face of the highest inflation readings in 40 years. The Dow Jones Industrial Average DJIA,
has fallen 9% this year, while the S&P 500 SPX index,
has a 13% discount so far. The performance of the 10-year Treasury note TMUBMUSD10Y,
has moved below 3%.

Most Fed officials are pushing for the Fed to raise rates by half a percentage point at the next two central bank policy meetings in June and July.

Last week, Bostic suggested that a break in September might make sense, causing some markets to rebound.

Bostic said a pause might be a good idea because the market’s response to the Fed’s rate hike to raise rates “was much stronger than we’ve seen historically.”

That raises the possibility that the broader economy will respond quickly to Fed rate hikes as well, he said.

“I want to make sure I really understand the pace of change associated with our political response,” Bostic said.

In September, part of the uncertainty over the economy could be resolved and labor market imbalances could be alleviated, leading to a “fairly significant reduction in inflation,” he said.

The opposite side of the coin is that inflation could remain higher, as supply chains remain broken by foreign events such as the war in Ukraine and the VOCID blockades in China.

The president of the Atlanta Fed said he wants the central bank to move its benchmark rate from 2% to 2.5% by the end of the year.

At the moment, if inflation does not go down significantly, Bostic said he would be “totally comfortable” with higher rates in a range that would restrict economic growth.

“The goal is to reduce inflation. We need to really address it in a deliberate and persistent way,” he said. “I want to be open to both possibilities.”

Following the expected rate hikes in June and July, the Fed’s policy rate would be in the range of 1.75% -2%.

On Monday, Fed Governor Christopher Waller rejected the idea of ​​a break in September, saying he was in favor of half-point rate hikes at the next “several meetings.”

The Fed Chairman of St. Louis, James Bullard, has said he wants the Fed to raise rates to 3.5% by the end of the year.

For his part, Fed Chairman Jerome Powell said he wants to raise rates until there is “clear and convincing evidence that inflationary pressures are declining and inflation is falling.”

Powell met with President Joe Biden at the White House on Tuesday. Analysts said the public meeting strengthened the Fed’s hand in fighting inflation.

Investors in financial futures markets think the Fed will raise rates to 3% by the end of the year and then stop.

Bostic said that inflation, measured by the rate of spending on personal consumption, would slow to just above an annual rate of 4% by the end of the year, from 6.3% to in April.

The minutes of the last Fed meeting show that Fed staff are forecasting PCE inflation to slow to a rate of 4.3% by the end of this year.

Bostic said some of his contacts are reporting the “first signs” of slower demand, which could take into account the final level of the Fed’s reference rate needed to control inflation.

While there is still no contraction, there is “less willingness to spend freely among certain segments of the population,” Bostic said.

For now, the decline in spending is concentrated on households that had less wealth and savings in the pandemic, he said. While there are many aggregate savings in the economy as a whole, distribution is divided so that richer households have more savings and can withstand higher inflation.

“As we go further, the number of families in this situation will go down, so we could see some reduction,” he said.

Bostic said there is “a lot of momentum in the economy.”

“The economy may slow for quite some time before it falls into a more recessive stance,” he said. “I understand the concern. I don’t think we’re all there yet.”

Bostic is not a voting member of the Fed’s interest rate committee this year. The Fed’s policy committee will meet June 14-15.

Fed officials will stop discussing the policy after this Friday, June 3, to prepare for the meetings.

Bostic, an expert on housing markets since previous work in the Department of Housing and Urban Development, said he expected housing markets to cool due to higher mortgage rates.

In “many markets,” this cooling “will not translate into total price reductions,” he said. Performance will depend on the economic performance of the local market, rather than the general phenomenon that became the norm, he said.

On Wednesday, the Fed will launch its “quantitative easing” program to reduce its balance sheet by $ 9 trillion, initially by $ 47.5 billion a month and then by $ 95 billion a month starting in September. That’s a little over $ 1 trillion in discounts each year. Overall, experts expect the Fed to cut its assets by about $ 3 trillion.

Bostic acknowledged that there was some uncertainty in the markets associated with the impact of quantitative easing and the Fed will make sure to understand how the markets respond.

“We’re going to proceed consistently,” Bostic said.

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